There’s a polite arrogance to the new king of primary molybdenum producers that comes with being the big kid on the block. This is how the CEO referred to Blue Pearl Mining during our hour-long phone interview in which we discussed developments at his company, the future of the molybdenum market and startups hoping to replicate his success.
Ian McDonald may well be entitled to his opinions. After all, Blue Pearl could produce the same number of pounds of molybdenum in 2007 that Cameco Corp would produce of uranium. (And free from those pesky legacy contracts or remediation efforts at Cigar Lake.) Blue Pearl is now the largest publicly traded primary producer of molybdenum. The company plans to mine about one fifth of the world’s primary molybdenum in 2007, about five percent of the world’s total molybdenum mined. His company will also roast about 12 percent of the world’s molybdenum. Not bad for a company that was a penny stock about seven months ago.
Blue Pearl has become a Bay Street darling since the company announced its bold $575 million acquisition of privately held Thompson Creek Metals Company. Having closed the transaction at the end of October, Blue Pearl now has two operating molybdenum mines and concentrators and one metallurgical (roaster) facility in Pennsylvania. In mid-June, the company’s shares were trading at less than Cdn$1.80; yesterday the share closed at C$12.06. Since the end of August, Blue Pearl shares have risen relentlessly, with only brief pauses in consolidation.
We were fortunate to have included Blue Pearl in our seminal molybdenum article on the metal’s relationship to the energy bull market, last July, at a time when few had heard of the company.
On Monday, the company announced encouraging cash flow from the recently acquired Thompson Creek operations. In the 67 days after this acquisition, Blue Pearl generated revenue of $150.8 million, about $2.25 million per day. Annualized, this could reach over $800 million in 2007 if the molybdenum price holds firm and production continues as planned.
Production costs from the company’s Thompson Creek and Endako molybdenum mines averaged $6.28/lb. The company sold this production at an average price of $25.74/pound. For 2008, the company expects to extract 27 million pounds from these mines. The firm molybdenum price helped Blue Pearl release the $64.3 million second lien credit facility in mid-March. According to Monday’s press release, the company’s cash balance is approximately $135 million.
The company expects its bank debt to fall to $320 million after paying its first quarterly installment in 2007 of $18.75 million. Blue Pearl incurred $401.9 million in long-term debt as part of its acquisition of Thompson Creek Metals. At current production rates, quarterly bank payments amount to little more than a week’s production.
What’s on Ian McDonald’s mind?
Historically, according to Western Troy’s Rex Loesby, annual demand for molybdenum has grown by about four percent since the 1950s. This fits well with McDonald’s forecast of £700m by 2020. to be the supply,” he told us. And where will this come from? “That, of course, is the big question,” McDonald said. “There is a dearth of new projects in the pipeline.” And he reminded us that China has started to consume more of its own molybdenum production.
As with uranium and other metals, China is a wild card for molybdenum supplies. In any molybdenum discussion, China remains a top concern for miners. “China was producing, 13 or 14 years ago, about 110 million pounds and exporting 100 million pounds to a market of 230 million pounds,” McDonald said. “Last year, in a 400 million pound market, China produced about 80 million pounds, exporting about 30 million net, so they’re keeping more. The story is they use more of their own.” He is quick to point out that world demand for molybdenum rose 6 percent in 2006, but China’s demand rose 20 percent.
“I’m not going to sugarcoat it,” McDonald notes. “If they wanted to make it look bad, they would. If they start littering the market, the whole world is devastated.” But he doesn’t think this is a likely scenario. There are only 39 large mines in the world that produce molybdenum, he told us. “But in China, there are over 500 small family operations. China wants to have some world-class companies, and they’ve shut down some of the smaller operations because they don’t use their energy efficiently. If you have a big mining company, they’re going to have a long-term vision and maximize the country’s resources”.
The origin of the supply is the second after the growing demand that McDonald’s foresees in the future. “There are a growing number of applications for molybdenum.” He pointed out that cars consume molybdenum. “There’s about 0.9 pounds or so in a dozen different places on the car, and with 55 million cars in the world, that’s about 50 million pounds.” This is probably the third largest application of molybdenum.
“High-end molybdenum stainless steel applications consume the most,” McDonald said. “Any steel that is used in the ocean or near the ocean has molybdenum in it.” He noted that Blue Pearl leaves about 10 percent of the company’s molybdenum production in sulfide form for the high-end lubrication market: the oil companies. “Most of it is converted to tech oxide, MO3, and about 25 percent would be ferromolybdenum,” he said. “We just sold some (ferromoly) in Europe at $34 a pound.”
His company was chosen to help produce advice on the recently launched Sprott Molybdenum Participation Fund. We asked him about his participation. “We get a small fee for storing molybdenum if they decide to buy,” she told us. It would be stored at the Blue Pearl metallurgical facility in Pennsylvania. “We would also sell them some,” she added. His company would not be advising the fund in which companies to take investment stakes. “It would be a conflict of interest and we would have to recuse ourselves,” she said.
See lack new offer on the horizon
“There is a tremendous barrier to entry for a new primary molybdenum mine to come online without a forward market,” McDonald observed. “Because without a forward sale, the financing requirements for the capital to build one of these new mines could be very, very challenging.” He believes one of the other big molybdenum mines will be funded, but cautioned: “I think once one does it, it doesn’t mean all are going to do it.” He explained his own personal experience: “When we raised the $575 million last year to buy Thompson Creek, this was a company that was making about $400 million a year after taxes, and we had some heavy lifting to do. It was tough. It would be difficult for another junior.”
One place he sees an imminent supply of molybdenum is Blue Pearl’s Davidson deposit, not far from the company’s Endako mine and milling facility. “We will have the feasibility in the second quarter, I say second quarter, but I hope it will be very soon,” McDonald told us. “It will become the highest grade molybdenum mine in the world.” He said his company was lucky to have gotten it three years ago. “It had been production-ready and a lot of development had been done on it.” So the company decided to move on to the final feasibility study instead of bothering with a scoping or pre-feasibility study. He said the Davidson project would be in full production in 2009.
What about mine development? “There are already 2.5 kilometers of underground works there and the ground conditions are excellent,” he said. “We opened it a couple of years ago, after no one had been underground in 25 years. The entire scale of the entire 1.5 miles fits in a five-gallon paint bucket.” McDonald told us that Blue Pearl plans to just mine the deposit and little else: “We won’t even crush it, just a rock breaker, and we’ll transport it to Endako.”
But Blue Pearl may have a partner in Davidson, the Japanese trading company, Sojitz. “They own 25 percent of Endako and they want to buy 25 percent of Davidson,” McDonald said. “It would make sense, if they own the same percentage of both. There would be no reclamation issues, or mineral mix and all that. We would have the same workforce.” He warned that the deal was not done yet. “We will look to possibly do a transaction with them.”
Another project where McDonald’s hopes to provide an additional supply of molybdenum is the possible expansion of Endako to a ‘super well’. The company plans to have the scoping study done later this year, possibly in June. “I feel pretty good about it, it’s pretty realistic,” he told us. “We’ve got a massive resource there, and it would be a pretty big job. But it could take some of these other young people out of breath.”
We talked about his vision to expand the plant to 50,000 tons per day. “It’s probably 32,000 tonnes a day now,” he said. The first step is to redo the reserve and resource calculations at Thompson Creek and Endako using a molybdenum price of $10/lb. The previous price was “too conservative,” according to McDonald’s. We suspect the higher resource figure would open the door to raise the probable $250 million to upgrade the facility to higher-tonnage operation. And his mind is already moving in that direction.
“Let’s say we did a study within the next year,” he explained. “Construction would take until 2008 or 2009. Unfortunately, since the mine has been in operation for 42 years, we would have to move the existing mill.” The mill would have to be moved because there is ore below the current site of the mill. “It won’t happen overnight,” she warned.
And what about those other junior molybdenum companies? “We’re not going to grow our company by buying all these other molybdenum deposits,” he replied. “Then we have to go and raise $700m, worry about marketing another £20m a year and bet the company on that. Personally, and our board agrees, we’d rather buy something that’s in production and pay a little more.” , or take something at a feasibility stage, like copper/molybdenum. We have a pretty good balance, or will have it by the end of this year. Then maybe we could buy some molybdenum production.”
What are your plans as 2007 progresses? “We qualified for the New York Stock Exchange,” McDonald confided. “We’ve talked to them. I think we’ll get things rolling this spring, and we could look for a consummation in early fall. We’re coming to the US, we qualified, and they seem quite interested in having us.”
Just to make sure we got his story right, McDonald added: “We’re not going to rest on our laurels. We have a lot of growth ahead of us, bringing in Davidson, expanding reserves at both mines and doing a scoping study.” to expand Endako. Our main job is to pay down debt and increase reserves. This is a lot. Everything is within our backyard and with our own experience. Whatever we do outside of that, we’ll do other things, I think. , but they are things that are going to be safe.”
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